A Nonlinear Factor Analysis of S&P 500 Index Option Returns
Growing evidence suggests that extraordinary average returns may be obtained by trading equity index options, and that at least part of this abnormal performance is attributable to volatility and jump risk premia. This paper asks whether such priced risk factors are alone sufficient to explain these average returns. To provide an answer in as general as possible a setting, I estimate a flexible class of nonlinear models using all S&P 500 Index futures options traded between 1986 and 2000. The results show that priced factors contribute to these expected returns but are insufficient to explain their magnitudes, particularly for short-term out-of-the-money puts. Copyright 2006 by The American Finance Association.
Year of publication: |
2006
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Authors: | JONES, CHRISTOPHER S. |
Published in: |
Journal of Finance. - American Finance Association - AFA, ISSN 1540-6261. - Vol. 61.2006, 5, p. 2325-2363
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Publisher: |
American Finance Association - AFA |
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